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The news of DeepSeek took the world by storm over the weekend and into Monday morning. The key question for U.S. investors is whether the era of U.S. Big Tech supremacy in AI is over. We don’t believe so and view today’s early price action as a market overreaction. The tech ecosystem is clearly adjusting to a potential new reality – that U.S. Big Tech will not be the only provider of cutting-edge AI capabilities. Despite today’s sell-off we remain favorable on U.S. Big Tech into earnings this week.

The news of DeepSeek took the world by storm over the weekend and into Monday morning, with internet stocks reacting sharply lower in the U.S. and sharply higher in China. The key question for U.S. investors is whether the era of U.S. Big Tech supremacy in AI is over. We don’t believe so and view today’s early price action as a market overreaction. In this brief commentary, we outline the reasons for this view.

Exhibit 1: Google searches for DeepSeek over took ChatGPT earlier this a.m.

1. The efficiency revelations stemming from reports that DeepSeek is able to outperform western models such as ChatGPT while significantly reducing the cost and time of training may in the end have a positive impact on the likes of Microsoft, OpenAI, META, Amazon and others. Assuming the efficiency reports are correct, these U.S. companies may explore introducing these efficiencies to their models, especially considering DeepSeek is open-source. Indeed, in a recent CNBC interview, the Perplexity AI CEO noted that companies could leverage DeepSeek’s R1 model for their own AI language models.1 However, there is also analyst talk that DeepSeek’s model is a derivative model that relies on larger foundation models, such as Meta’s open-source Llama models – so it doesn’t actually replace it2.

2. DeepSeek is not a true substitute for ChatGPT given the data privacy and security concerns associated with a China-based app in the era of heightened geopolitical and tech vigilance between the U.S. and China. Despite the DeepSeek app climbing to the #1 download under the free app section on the Apple App Store early Monday morning, the app itself restricted its use to Chinese numbers only. Additionally, even without this step, given the scrutiny around TikTok for similar privacy and security reasons, we would not be surprised by potential Trump administration moves to try to block its use.

3. Growing AI competition from China (which should not be at all a surprise as the country has long prioritized AI development) may actually increase the focus on domestic U.S. AI investment. This should support robust AI capex benefiting a range of semiconductor, power producer and data center companies. Plus, analysts note that AI semiconductor demand is also coming from a variety of foundational and derivative models, as well as cloud, enterprise and sovereign AI customers. Additionally, we still expect increased demand for semiconductors from the buildout of physical AI. Thus, the demand for compute still seems broad and robust, even if hyperscalers may learn to train AI more efficiently.

4. U.S. domestically focused software companies should continue to roll out AI capabilities, beyond the broadly publicized available agents like ChatGPT. If there is anything to be learned from the DeepSeek open-source model, they may be able to do it more efficiently/cheaper. Investors seem to agree as the Goldman Sachs AI Software basket traded much better than other AI beneficiary baskets throughout the day.3

5. Big tech earnings reports are front and center this week, potentially alleviating the DeepSeek concerns. Microsoft and Meta report on Wednesday and Apple on Thursday. Together, the Mag 74 stocks are forecast to report +21.7% Q4 ’24 EPS growth and analysts expect ongoing 17% – 24% quarterly year-over-year earnings growth through 20255. We will be looking for constructive commentary confirming expected solid demand for AI products despite the launch of DeepSeek. Additionally, we will be paying close attention to any commentary on less semiconductor content needed for AI capex, and/or any talk of lower unit prices on these chips.

Investment Implications

The tech ecosystem is clearly adjusting to a potential new reality – that U.S. Big Tech will not be the only provider of cutting-edge AI capabilities. But for the reasons outlined above and given protectionist stances on AI in both U.S. and China, our early takeaway is that there is room for both U.S. and China-based AI products to grow and co-exist, and they do not immediately replace one another.

We remain favorable on U.S. Big Tech into earnings this week; we continue to favor AI software and AI power companies given their domestic focus and especially now on the pullback; and we remain vigilant on AI semiconductors but see a potential opportunity to add, assuming we hear constructive commentary on semiconductor capex from hyperscalers this week.

Exhibit 2: DeepSeek news has created bifurcation in the AI space, with AI Software maintaining strength

1. How China’s new AI model DeepSeek is threatening U.S. dominance, as of Jan. 24, 2025.
2. BofA Global Research, as of Jan. 27, 2025.
3. Goldman Sachs, as of Jan. 27, 2025.
4. Mag 7 stocks include: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla.
5. FactSet Earnings Insights, as of Jan. 17, 2025.


INDEX DEFINITIONS

Goldman AI Hardware Basket: designed to represent the 3 of the 4 main components of data centers: (1) the facility itself; (2) the industrial equipment, including the mechanical, electrical; (3) the IT hardware.
Goldman Sachs Power Up America Basket: composed of unregulated energy producers and related industries that benefit from the rising demand of power.
Goldman Sachs AI Semiconductor Basket: composed of semiconductors names with the potential for AI to drive incremental earnings, and excluding analog semiconductors.
Goldman Sachs AI Software Basket: composed of software names with the potential for AI to drive incremental earnings, which include infrastructure, platform and security layers of the stack.
S&P 500 Index: The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 of the top companies in leading industries of the U.S. economy and covers approximately 80% of available market capitalization.

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Anastasia Amoroso

Anastasia Amoroso
Managing Director, Chief Investment Strategist

Anastasia Amoroso is a Managing Director and the Chief Investment Strategist at iCapital. In this role, she is responsible for providing insight on private and public market investing opportunities for advisors and their high-net-worth clients. Previously, Anastasia was an Executive Director and the Head of Cross-Asset Thematic Strategy for J.P. Morgan Private Bank, where she identified and invested in emerging technologies and disruptive trends such as artificial intelligence, decarbonization, and gene therapy. She also developed global tactical ideas and implemented institutional-level implementation across asset classes for clients. Anastasia regularly appears on CNBC and Bloomberg TV and is often quoted in the financial press. See Full Bio.

Peter Repetto

Peter Repetto
Vice President, Investment Strategist

Peter is a Vice President and Investment Strategist at iCapital, focusing on developing and delivering research, investment ideas, and thought leadership content for external and internal audiences on behalf of iCapital’s Investment Strategy team led by Anastasia Amoroso, Chief Investment Strategist. Prior to joining the firm, Peter spent over eight years at Franklin Templeton Investments, where he contributed to their asset allocation strategy and macroeconomic research. Peter holds a BA in Economics from Fairfield University.

Nicholas Weaver

Nicholas Weaver
Associate, Investment Strategist

Nicholas is an Associate and Investment Strategist at iCapital, responsible for providing insights into investment opportunities across public and private markets. He works alongside Anastasia Amoroso, Chief Investment Strategist at iCapital. Prior to joining iCapital in 2021, Nicholas spent time as an analyst at a buy-side investment firm, where he contributed to equity and private market research. Nicholas holds a Bachelor of Science degree with a double major in Finance and Business Analytics & Information Technology (BAIT) from Rutgers University.